Abstract

We exploit cross‐temporal differences in capital gains tax rates to test whether shareholder‐level capital gains taxes are
associated with higher acquisition premiums for taxable acquisitions. We model acquisition premiums as a function of proxies
for the capital gains taxes of target shareholders, taxability of the acquisition, and tax status of the price‐setting shareholder
as represented by the level of target institutional ownership. Consistent with a lock‐in effect for acquisition premiums,
results suggest a unique positive association between shareholder capital gains taxes for individual investors and acquisition premiums for taxable acquisitions, which is mitigated by target institutional ownership.